Central banks won’t be able to stop printing money like in 1994 so buy gold

It’s curious to hear economists like ex-Goldman Sachs chief Jim O’Neill talking about the bond market having the same feel as in 1994 when the Fed also tightened monetary policy, but it is just not going to happen this time.

It’s curious to hear economists like ex-Goldman Sachs chief Jim O’Neill talking about the bond market having the same feel as in 1994 when the Fed also tightened monetary policy, but it is just not going to happen this time.

Why? Because the world is addicted to the crack cocaine of cheap money and the global economy will collapse in a heap if it is taken away.

Policy trial?

What we are seeing at the moment is a brief flirtation with this idea by the Fed. We are already witnessing the only too predictable outcome of a squeeze in global bond and equity markets.

Of course it will have to hit Wall Street harder for the hawks to back off. Then there will be another rally. The truth as so often stated by Fed chairman Ben Bernanke is that monetary stimulus can only be taken off if the US economy is in a sustainable recovery.

If you look at the revised World Bank economic outlook today then this is most clearly not happening. Perhaps the US is managing to export its economic problems overseas but how long is that sustainable?

The dollar is already rising and that’s bad for export income, and precisely the reverse of what the Fed’s QE program is supposed to achieve. Remember the aim is to devalue the dollar, increase inflation and reduce debt.

This outcome is making the dollar strong, deflating import prices and increasing the cost of servicing massive US debts. It’s a disaster in the making.

QE-free?

Take QE away and you burst the US bond market like in 1994, except that this time is different because the bond market bubble is much bigger.

Where Jim O’Neill is undoubtedly correct is that bursting the US bond bubble would have very widespread consequences. Cheap money has driven up the price of everything from emerging market bonds to Dubai real estate and gold. Predicting how all this will unwind is far less simple.

Do we get widespread asset price destruction and a strong dollar? How is that compatible with a US bond bust that savages the savings of those invested in this asset class, and they include the world’s pensions and central banks?

If you are left holding a strong dollar but only half as many of them what sort of bonus is that? Plus you then have the US economy as the least competitive in the world as a replacement for Japan.

Not like 1994

We can only hope that the omnipotent Fed has thought all this through but we don’t see an exact parallel with 1994.

The size of the excess is so much bigger it suggests a far bigger impact on asset valuations and the far greater interconnection of global markets will mean far more contagion.

What is the last asset class you would want to hold in a global mayhem? We think it is still gold because the central banks will have to respond to such a crisis by doing the only thing they can do and print more money.

Eventually and probably is not such a long time, gold and silver will have their day as the monetary metals. Then you need a global monetary reset tied to gold and silver if you want world trade to function.

One thing is certain we have a very volatile and traumatic phase ahead in the global economy. This is systemic like in 2008-9 and this time the system will have to be replaced, not put on life support.